Analysis for DCM Shriram Ltd

Leverage Analysis

Leverage Analysis
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
2013 2014 2015 2016 2017
Operating Leverage 6.17 -0.60 2.70 4.48 25.63
Financial Leverage 1.48 1.09 0.47 1.20 1.20
Degree of Combine
9.154 -0.655 1.257 5.381 30.689
Leverage

Operating Leverage Financial Leverage Degree of Combine Leverage

DOL -
The Degree of Operating Leverage shows the effect of an amount of operating leverage on the
company’s earnings before interests and taxes (EBIT). Operating Leverage takes into account the
proportion of fixed costs to variable costs in the operations of a business. If the degree of operating
leverage is high, it means that EBIT would be unpredictable for the company, even if all the other
factors remain the same.
DOL = % Change in EBIT / % Change in Sales
The Degree of Operating Leverage Ratio helps a company in understanding the effects of operating
leverage on the company’s probable earnings. It is also important in determining a suitable level of
operating leverage which can be used in order to get the most out of the company’s Earnings before
interest and taxes or EBIT.
If the operating leverage is high, then a smallest percentage change in sales can increase the net
operating income. The net operating income is the amount of income that is left after payments of
fixed cost are made, regardless of how much sales has been made. Since the Degree of Operating
Leverage or DOL helps in determining how the change in sales volume would affect the profits of the
company, it is important to ascertain the value of degree of operating leverage in order to minimize
the losses to the company
In 2014, EBIT decreased substantially, that’s why their DOL became negative, later on EBIT and
revenue kept on increasing which shows incremental DOL. In 2017, EBIT significantly increased
with respect to revebue, so it went as high as 25.63-which shows small increase in sales will lead
higher profit.

DFL-
The degree of financial leverage shows the effect of an amount of financial leverage on the earning
per share of a company. The degree of financial leverage or DFL makes use of fixed cost to provide
finance to the firm and also includes the expenses before interest and taxes. If the Degree of Financial
Leverage is high, the Earnings Per Share or EPS would be more unpredictable while all other factors
would remain the same.
 DFL = % Change in EPS / % Change in EBIT

The degree of financial leverage or DFL helps in calculating the comparative change in net income
caused by a change in the capital structure of business. This ratio would help in determining the fate
of net income of the business. This ratio also helps in determining the suitable financial leverage
which is to be used to achieve the business goal. The higher the leverage of the company, the more
risk it has, and a business should try and balance it as leverage is similar to having a debt.

In 2014 and 2015, EPS decreased more drastically than EBIT, so DFL decreased. In 2017, both EPS
and EBIT improved significantly for which DFL increased. This also shows the interest expense is
decreasing over the years, but yet the firm is risky as financial leverage goes up. Basically it indicates
% change in EPS resulting from 1% change in EBIT.

Debt Equity Ratio

DEBT-EQUITY RATIO
By Book Value of Equity By Market Value of Equity

1.400
1.200
1.000
0.800
0.600
0.400
0.200
0.000
2012 2013 2014 2015 2016 2017
By Book Value of Equity 0.602 0.444 0.349 0.163 0.123 0.187
By Market Value of
1.245 0.931 0.616 0.248 0.119 0.094
Equity

By Book Value of Equity- Debt/Equity

The ratio decreased in a trend, as over the years Equity increased over debt. Low D/E ratio shows the
company isn’t leveraging their debt utilisation capacity. Low D/E ratio suits the company working in
volatile condition. It lowers cost of capital

By Market Value of Equity

As their debt significantly decreased over the years, as they paid out interests and also, their market
capitalization and share price increased, D/E goes on decreasing over the years. It indicates the
company has less long term deliberation of loans.
 Interest Coverage Ratio

Interest Coverage Ratio

12.00

10.00

8.00

6.00

4.00

2.00

0.00
2012 2013 2014 2015 2016 2017
Series1 1.66 3.89 4.92 5.55 8.95 10.24

The interest coverage ratio measures a company’s ability to make interest payments on its debt in a
timely manner. It calculates firm’s ability to serve interests. It indicates the profitability and risk of a
company. If a company can’t afford to pay the interest on its debt, it might not afford to pay the
principle payments.

As over the years DCM Shriram’s debt is coming down, interest expense is diminishing, also EBIT is
on a growing trend. So ICR is increasing which shows they are earning enough revenue to serve
interest on their additional debt.

Dividend Policy

Dividend Payout Ratio 2012 2013 2014 2015 2016 2017

0.153 0.106 0.142 0.175 0.166 0.169

The dividend payout ratio is expressed as = dividend per share/EPS

In 2013, EPS drastically increased from 2.62 to 15.04 Rs, so DPR fell down. After that both dividend
and EPS were on increasing trend which is shown by the improved ratio as is in the table.

The company hasn’t issues any bonus share or stock split in last 6 years. Though they in 2005
approved bonus issue of one equity share for every one equity share and a stock split of five shares for
every one share of Rs 10.
In 2014, DCM Shriram bought back 3487183 equity shares of Rs 2 each.